The Bigger The Unproductive Firm, The More Vital It Is To Let It Fail

Countless flaws infect the arguments – offered in your pages today by both Jeffrey Sachs and Robert Samuelson – for a government bailout of GM, Ford, and Chrysler. Not least among these flaws is the common presumption that these firms are too big to be allowed to fail.

These firms certainly are big, meaning that they use unusually large amounts of productive resources. If they have reasonable potential to put these resources to good use in the future, Chapter 11 bankruptcy will likely uncover this fact and ensure that these firms are not disassembled. But if the only way to keep these firms operating is a government bailout, then taxpayers will be subsidizing the continued employment of gargantuan quantities of productive resources in unproductive pursuits. That’s a recipe for economic stagnation.

Popular sentiment has it backward: the bigger the unproductive firm, the more vital it is to let it fail.

Sincerely,

Donald J. Boudreaux

Don Boudreaux is the Chairman of the Department of Economics at George Mason University and a Business & Media Institute adviser.